Process: 58/2016-T

Date: October 12, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

This arbitral decision concerns a VAT regularization dispute involving A... LDA, a construction company, and the Portuguese Tax Authority. The case centers on whether input VAT deducted in 2005 must be regularized when corresponding output VAT was canceled in 2009. In 2005, A... subcontracted C... for construction work on a property owned by B..., receiving invoices totaling €1,663,893.66 including €282,328.66 VAT, which A... fully deducted. A... then invoiced B... for the work. However, the construction was suspended by municipal authorities in 2005. In May 2009, the contract between A... and B... was terminated, with A... reimbursing €1,725,000.01 (including €288,962.79 VAT) and issuing credit notes canceling the 2005 invoices. A... entered this VAT amount as a tax adjustment in its 2009 quarterly return. The Tax Authority conducted an audit and issued an additional VAT assessment of €288,962.80 plus €44,397.35 in compensatory interest, arguing that when A... adjusted output VAT through credit notes, it should have simultaneously regularized the input VAT previously deducted from C...'s invoices. A... contended that input VAT regularization was inappropriate because C... actually performed the work, even though the ultimate client contract was canceled, and no contentious proceedings existed between A... and C.... After the Tax Authority dismissed A...'s hierarchical appeal, the company initiated CAAD arbitration proceedings under Decree-Law 10/2011 (RJAT), seeking annulment of both the dismissal decision and the additional VAT assessment. The arbitral tribunal was constituted with three arbitrators appointed by the parties and CAAD, with a hearing held to examine witness testimony and written submissions.

Full Decision

ARBITRAL DECISION

The arbitrators Counselor Jorge Manuel Lopes de Sousa (arbitrator-president), (appointed by the other Arbitrators), Dr. Patrick Dewerbe and Dr. Emanuel Augusto Vidal Lima, appointed respectively by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 21-04-2016, agree as follows:

1. REPORT

A…, LDA., legal entity no.…, with registered address at Avenue …, no.…, …-… Lisbon, (hereinafter referred to as "Claimant" or "A…"), came, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January ("RJAT"), articles 99 et seq. of the Code of Tax Procedure and Process ("CPPT") and numbers 1 and 2, paragraph d) of article 95 of the General Tax Law ("LGT"), to request the constitution of an Arbitral Tribunal with a view to the annulment of the Decision of Dismissal handed down in Hierarchical Appeal proceedings and annulment of the tax acts of additional VAT assessment no.…, in the amount of €288,962.80, and of assessment of compensatory interest no.… in the amount of €44,397.35.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant appointed as Arbitrator Dr. Patrick Dewerbe, under the terms of article 6, number 2, paragraph b), of RJAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 19-02-2016.

Pursuant to paragraph b) of number 2 of article 6 and number 3 of RJAT, and within the period provided for in number 1 of article 13 of RJAT, the highest official of the Tax Administration service appointed as Arbitrator Dr. Emanuel Augusto Vidal Lima.

The Arbitrators appointed by the Parties agreed to appoint Counselor Jorge Lopes de Sousa as arbitrator-president, who accepted the appointment.

Pursuant to and for the purposes of number 7 of article 11 of RJAT, the President of CAAD informed the Parties of this appointment on 05-04-2016.

Thus, in compliance with the provision of number 7 of article 11 of RJAT, with the period provided for in number 1 of article 13 of RJAT having elapsed without the Parties having anything to say, the Collective Arbitral Tribunal was constituted on 21-04-2016.

The Tax and Customs Authority responded, arguing that the request for arbitral ruling should be judged unfounded.

On 15-06-2016, a hearing took place in which testimony was produced and it was agreed that the proceedings would continue with written submissions.

The Parties presented their submissions.

The Arbitral Tribunal was duly constituted.

The parties have legal personality and capacity, are legitimate (articles 4 and 10, number 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings are not affected by nullities.

There are no obstacles to the assessment of the merits of the case.

2. FACTUAL MATTERS

2.1. Proved Facts

The following facts are considered proved:

· The Claimant A…, LDA., is a limited liability company, commenced activity in May 2005, with the corporate purpose of "Architecture, construction, reconstruction, administration, purchase for resale of urban or rustic real property, as well as administration, creation and operation of commercial, industrial and hotel establishments, public works, preparation of articles of association and engineering projects", CAE…, being classified for VAT purposes under the normal regime with quarterly periodicity;

· The Claimant was created with the objective of adapting and constructing the "…", for B… (B…), located in the urban real property situated at Av…, number…, Lisbon, registered in the urban property register of the parish of … in Lisbon, under article…;

· In the year 2009, the activity of A… was restricted to direction services and management of the work carried out in the property referred to, owned by B…;

· In the year 2005, the Claimant subcontracted the company "C…, Lda." to carry out the adaptation and construction works of the …;

· Still during the year 2005, C… issued eight invoices, in the name of the Claimant, in the aggregate amount of €1,663,893.66, including VAT in the amount of €282,328.66, detailed in the table below:

· Still in 2005, the Claimant recorded in the balance sheet item for products and work in progress the value of 1,381,565.00 euros and, in the statement of results, recorded the same amount as a positive production variation, resulting in a nil net effect;

· The Claimant fully deducted, in the year 2005, the amount of VAT that applied to the said invoices, totalling €282,328.66;

· Still in 2005, the Claimant invoiced B… (B…), as follows:

· Still in the year 2005, the work was enjoined by the Urban Planning Management Department … of the Lisbon Municipality and the construction works were suspended;

· In May 2009, a new contract was concluded between B… and A…, by which the previous contract was terminated and A… reimbursed to B… the amounts previously paid, in the total amount of €1,725,000.01 (including €288,962.79 of VAT), and issued 7 credit notes to cancel the corresponding invoices of 2005;

· In the year 2009, the Claimant maintained on the balance sheet item for products and work in progress the value of €1,381,565.00;

· In the periodic VAT return for 2009/12T (final quarter of 2009), the Claimant entered in field 40 for tax adjustments in favour of the taxpayer, the amount of €288,962.79;

· There has been and continues to be no contentious proceedings between the Claimant and C… relating to the facts referred to;

· The work that was carried out included demolitions and construction of structures;

· The Tax and Customs Authority carried out an audit inspection of the Claimant, pursuant to service order no. OI2013…/…, of 11-07-2013, from the Finance Directorate of Lisbon;

· In that audit inspection, the Tax Audit Report was prepared, which forms part of the administrative file, the content of which is reproduced herein, and which mentions, amongst other matters, the following:

II.2 - Reason, Scope and Temporal Scope

The present inspection action, of partial scope (paragraph b) of number 1 of article 14 of the Complementary Tax Inspection Procedure Regime (RCPIT)), focused on the year 2009, in the context of VAT, and the year 2010 in the context of IRC, for the Company A…, with registered address at Ava…, nº … …-… Lisbon (cf. annex 2).

The taxpayer was selected for local control action (control action of overall tax situation), following inspection of a religious community designated as "B…", hereinafter referred to as B…, with NIPC…, which requested VAT refund, pursuant to Decree-Law no. 20/90, and which has common shareholders. Consequently, the above-mentioned service orders were opened, with the PNAIT code 1…, Overall tax situation control actions, external, partial, legal entities.

(...)

II.3.7 Classification of the Activity Carried Out by A…

(...)

In the course of analysis of the refund request for VAT by B…, this entity was questioned via email by these inspection services regarding the execution of works and issuance of Credit Notes, to which it replied "the cancellations did not relate to invoices for works actually carried out on the property, and the invoices issued constituted advances on account of the execution of works that were never carried out, hence the termination of the contract between B… and A…."

When questioned regarding the reasons for not adjusting the input VAT from invoices issued by C…, given that the output VAT was adjusted via Credit Notes, and that value remained in the final inventory of products and work in progress, A… responded: "Regarding this matter, although the cancellation of invoices issued by A… to B… was recorded, the same cannot occur between A… and C…, since the latter ceased to be available to provide services to A…/B…, including any contact in this regard proved unsuccessful, with C… having breached its contractual duties, and its corporate whereabouts being unknown. However, A… proceeded with payment of all invoices issued by C… (...), with the exception of invoice no.…, dated 19 December 2005, in the amount of €152,357.15, which A… did not pay, since at that time it had already learned of the inability to locate the C… company. Nevertheless, it is also important to note that at the time of the facts, no contentious proceedings were initiated by B…, due to the ethical principles inherent to the religious organization, since, being an organization … dedicated to promoting peace and non-conflictuality, it did not pursue any action against the aforementioned C… company.'(cf. annex 9)

(...)

III.1 – VAT for 2009

IMPROPER DEDUCTIONS

The VAT adjustments in favour of the taxpayer and their supporting documentation were analyzed, and it was verified that these adjustments were based on the issuance of 7 credit notes, which cancel 7 invoices of equal amount. (cf. annexes 7 and 8).

These invoices had been issued, in 2005, to B…, described as "Payment on Account of Construction of the …", in the aggregate amount of 1,725,000.00 euros, and were based on the subcontracting of C…'s construction services, in the amount of 1,663,893.66 euros.

In 2005, A… assessed VAT in the amount of 288,962.79 euros, which 4 years later, in 2009, was adjusted in its favour, through the issuance of Credit Notes (cf. annex 8) shown below, and the beneficiary, B…, is not a VAT taxable person, and therefore will not remit this VAT to the State.

Considering the fact that gave rise to the VAT adjustment - termination of the contract between B… and A… - it is found that it does not comply with article 78 of the VAT Code, for the following reason:

Although the initial contract for works was concluded between B…, A… and C…, in 2005, its termination in 2009 occurred only between the first two entities, that is the sub-contractor of the work did not participate in this termination.

There was no return of any goods or merchandise, nor was the inventory account of products and work in progress adjusted in this period.

Furthermore, it is naturally impossible to achieve reciprocal restitution of the contractual performances in question, as there was completion of part of the agreed work, as appears from the description of invoices issued by C….

However, even if this work had not been completed, it entered A…'s patrimonial sphere via the balance sheet item "products and work in progress".

As acknowledged by A…, no legal action was brought against C… for performance of the contractual obligation, or for the return of benefits already paid, and therefore there was also no attempt to recover this VAT downstream.

For the reasons indicated, and as the situation does not comply with article 78 of the VAT Code, which addresses VAT adjustments, the periodic return for 2009/12T should be corrected, removing the amount of 288,962.79 euros from field 40, adjustment in favour of the taxpayer.

· Following the inspection, the Tax and Customs Authority issued the VAT assessment no.…, of 14-01-2014, relating to the period 2009-12T, in the amount of €288,962.79 and the assessment of compensatory interest no.…, of the same date, in the amount of €44,397.35;

· On 30-05-2014, the Claimant filed a gracious complaint against the aforementioned assessments;

· The gracious complaint was dismissed by order of 31-10-2014, of the Deputy Finance Director in substitution, manifesting agreement with an information, the content of which is reproduced herein, and which mentions, amongst other matters, the following:

Regarding this matter, it can be gathered from the competent inspection report, contained at pages 53 to 67, more specifically at pages 62/63, the reasoning that supports the assessments in question, which we endorse entirely, and therefore, to avoid repetition and prolixity, we reproduce it here in its entirety, for all due legal purposes, from which it can be unequivocally gathered that the VAT adjustments carried out by the Claimant cannot be subsumed within the provision of article 78 of the VAT Code, more specifically in its number 2.

This is because, at the genesis of the said adjustments, lies the issuance of credit notes by the Claimant to B…, as a result of the termination in 2009 of the contract concluded in 2005 between these entities and the C… company, as appears from page 22 (being certain that in the contract termination agreement only the first two entities participated, see pages 29/30), the circumstances that led to this termination already existed much earlier, more precisely at the end of the year 2005, as acknowledged by the Claimant, hence it already had knowledge of the inability to locate the C… company at that date, which is why it did not proceed with payment of its invoice no.… dated 19-12-2005.

And, if that is the case, those same entities could not, at their own discretion, proceed with the termination of the said contract only in 2009, that is, almost four years after the conclusion of the terminated contract, since, for tax purposes, such termination should be contemporaneous with the date on which the conditions for such termination obtained, that is, at the end of 2005 as acknowledged by the Claimant, hence there was a violation of number 2 of the cited article 78 of the VAT Code, with all legal consequences arising therefrom, in particular the consideration of the mentioned illegal adjustments, because carried out contrary to the right to timing established by law.

Moreover, such a situation already obtained (that is, the violation of number 2 of article 78 of the VAT Code), at the time of the actual adjustment of tax in favour of the taxpayer in the amount of €288,962.79, to the extent that, considering not only the date the contract was terminated (04-05-2009), but also the date the first credit note was issued (04-05-2009), and also what is prescribed by number 2 of the already mentioned article 78 of the VAT Code, regarding the period in which such adjustment should occur (until the end of the tax period following that in which the circumstances occurred that determined the cancellation of the assessment or the reduction of its taxable value), at least the adjustments relating to credit notes 1 to 5 (from the table at page 62 of the present records), are illegal, because carried out in a period different from that prescribed by the tax legislator.

As to the alleged double taxation/duplication of collection, we understand that the Claimant's argument also lacks merit, since both doctrine and case law of our superior courts (see for example the Decision of the Supreme Administrative Court of 04-05-2011 – Case no. 33/11-30, viewable at "http://www dgsi pt"), which hold that [from the standpoint of law, by lack of the three identities of the legal concept of duplication of collection (identical tax for the same taxable event and for the same time period, especially through the modus operandi proper to the functioning of VAT as a "tax credit" system, the VAT that a company has included in invoices issued by it, is owed only by it and, once it has been paid, does not become "duplication of collection/double taxation", the VAT debt of another taxable person.], because one cannot speak here of the aforementioned legal institute of duplication of collection/double taxation, when the taxable person is not the same, nor is there unity of the taxable event.

Therefore, by all that we have stated, we understand that the present Gracious Complaint should be dismissed, in its entirety, with all legal consequences arising from such fact, in particular to maintain in the tax legal order, the assessments in question, because, in our view, they are legal, to the extent that they do not suffer from the vice(s) attributed to them by the Claimant.

· On 09-12-2014, the Claimant filed a hierarchical appeal of the decision dismissing the gracious complaint, which was dismissed by order of 29-10-2015, of the Deputy General Director of the Tax and Customs Authority, manifesting agreement with an information, the content of which is reproduced herein, and which mentions, amongst other matters, the following:

2 - Assessment of the Hierarchical Appeal

  1. In the present hierarchical appeal is under analysis the legality of the tax adjustment carried out by the Appellant, in the period 2009-12T, in the amount of €288,962.79. This adjustment originates from seven credit notes issued by it in favour of B…, between 2009-05-04 and 2009-11-03, relating to billing related to the construction works of the ….

  2. It is considered that the arguments presented by the Appellant have little credibility in light of the invoicing and payment practices that characterize the civil construction sector and the accounting documentation issued in the execution of the contract for work in question.

  3. In reality, it appears truly anomalous that a works owner or an intermediary thereof (as is asserted by the Appellant) would proceed with the payment of €1,381,565.00 to the contractor as an advance on works to be performed, especially if we take into account the global price of the works contract in question.

  4. Furthermore, having analyzed the description of the billing issued by the contractor (C…) to the Appellant, it is evident that these concern services provided and supplies of goods actually performed and not advances.

  5. For its part, the billing issued by the Appellant to B… contains the description of "Payment on Account of Construction of the …", not because advances are in question, but because it is, essentially, the pass-through of the payment made to the contractor, as is stated, moreover, in the appeal petition.

  6. Thus, the billing cancelled by the credit notes concerns operations actually performed and which, as such, are subject to VAT taxation. All existing evidence points to this understanding, and the Appellant has not succeeded in proving its contrary thesis, failing to present any documentation relating to the execution of the work.

  7. It is thus clear that the requirements provided for in number 2 of article 78 of the VAT Code were not met, lacking in particular cancellation or reduction of the taxable value of the operation as a result of invalidity, termination, rescission or reduction of the contract, return of goods or grant of discounts and rebates.

  8. As is evident, for the purposes of this rule, the contractual rescission that allows the adjustment relates to that which occurs before the execution of the contracted works, having no application in situations where the taxed operations are actually performed, even if subsequently there is a dispute between the parties concerning the execution of that contract.

  9. That is, the cancellation of the invoices would only be legitimate if the operations that they evidence had not been performed, which is not the case. This results, moreover, from the rule itself, which refers to cancellation or reduction of the taxable value of the operation, that is, to a situation in which the invoice comprises more works than those that were actually performed.

  10. Moreover, regardless of the intended cancellation of part of the billing, the obligation to assess and remit the tax relating to the works performed would always remain, since, pursuant to articles 7 and 8 of the VAT Code, taxation does not depend on the issuance of an invoice.

  11. Furthermore, even if the operations evidenced by the invoices had not been fully performed, the credit notes for cancellation purposes would have to reflect the exact measure of operations not performed, which, as is obvious, did not occur.

  12. The improcedence of the claim presented is demonstrated by the reasoning of the Appellant according to which all invoicing for the work was cancelled and to simultaneously admit that there was a small percentage of construction performed, for, in these circumstances, the credit notes have to be considered inadmissible in their entirety.

  13. If the allegation were to be believed, which it is not, total billing for the part that corresponds to work performed could not be cancelled, and it would be the Appellant's burden to proceed with invoicing the work in consonance with the level of execution of the works.

  14. This legal impossibility of adjustment is not prevented by the fact that the cancellation of the invoices corresponded to the will of the intervening parties, for the obligations of tax assessment and the requirements for adjustment are not at the disposal of the parties, all the more so since operations are at issue between taxable persons with special relationships pursuant to number 4 of article 63 of the Corporate Income Tax Code.

  15. Furthermore, even if the conditions provided for in number 2 of article 78 of the VAT Code were met, the adjustment must be made "until the end of the tax period following that in which the circumstances that determined the cancellation of the assessment or the reduction of its taxable value occurred".

  16. Now, having the contract termination agreement between B… and the Appellant been concluded on 2009-05-04, pursuant to the cited rule, the adjustment could only be carried out until the end of the following tax period, that is, 2009-09-30. Which means that the credit notes …/2005, of 2005-10-18, …/2005, of 2005-11-18 and …/2005, of 2005-11-20, were issued beyond the period provided for in the VAT Code.

  17. Nor does the invocation of duplication of collection have any basis, not resulting from the circumstance that the VAT adjustment was considered improper and, subsequently, the refund request was dismissed (presented by B…).

  18. Moreover, the dismissal of the refund request was based on other grounds, namely untimeliness, the circumstance that (in B…'s allegation) the construction works were never performed and a cost structure was not presented, relating to direction and supervision services of the works, which justifies the VAT borne.

  19. It is evident that there is no duplication of collection, for purposes of number 1 of article 205 of the CPPT, to the extent that the taxable facts are different, the VAT assessment being owed by different work contracts, occurring in distinct tax periods.

V - RIGHT TO HEARING

  1. Pursuant to paragraph b) of number 1 of article 60 of the LGT, the taxpayer must be assured the "right to hearing before the full or partial dismissal of requests, complaints, appeals or petitions". However, in accordance with number 3 of the same provision, "having the taxpayer been previously heard in any of the phases of the procedure referred to in paragraphs b) to e) of number 1, their hearing is dispensed with before the assessment, except in case of invocation of new facts on which they have not yet pronounced".

  2. And in accordance with number 3 of article 60 of the LGT, the dismissal of the hierarchical appeal, based on the grounds exposed, does not require prior hearing, since, no new facts having been invoked, the Appellant already had the opportunity to exercise this right in the context of the gracious complaint procedure, having been notified for this purpose by letter no.…, of 2014-09-22, from the Finance Directorate of Lisbon.

VI - CONCLUSION

  1. In conclusion, without the need for prior hearing of the Appellant, it is proposed to dismiss the hierarchical appeal filed from the order of the Deputy Finance Director of Lisbon, of 2014-10-31, which dismissed the gracious complaint no. …2014…, relating to the additional VAT assessment no.…, of 2014-01-04, of the period 2009-12T, in the amount of €288,962.79 and the assessment of compensatory interest no.…, of the same date, in the amount of €44,397.35.

· Notification of the Claimant for exercise of the right to hearing before the decision of the hierarchical appeal was not made;

· On 02-02-2016, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproved Facts and Reasoning of the Decision on Factual Matters

The facts were given as proved based on the documents attached to the request for arbitral ruling and those that form part of the administrative file.

There are no unproved facts relevant to the decision of the case.

3. LEGAL MATTERS

The religious institution B… hired the Claimant A… for the purpose of adapting an existing building at no. … of Av …, in Lisbon, with a view to the construction of a … intended for the worship of the religious institution.

The Claimant A… concluded with the company C…, Lda. a contract for work for the execution of civil construction works.

Works were performed by C… which, in 2005, issued 8 invoices to the Claimant in the total of €1,663,893.66 [€1,331,565.00 + €282,328.66 of VAT].

In that same year, the Claimant issued 7 invoices to B… totalling €1,725,000.01 (€1,463,037.22 + €288,962.79 of VAT], as payments on account of the adaptation and construction of the temple.

Because it is a religious institution exempt from VAT, B… requested the refund of VAT borne pursuant to the terms provided for in Decree-Law no. 20/90.

Still in that year, the Claimant maintained on the balance sheet the value of €1,381,565.00 relating to products and work in progress.

In May 2009, termination of the contract between B… and the Claimant occurred, with the latter cancelling the 7 invoices issued in 2005, in the total value of €1,725,000.01 (€1,463,037.22 + €288,962.79 of VAT] and issuing to B…, between 04-05-2009 and 03-11-2009, 7 credit notes corresponding to the said invoices and having entered in the periodic VAT return for 2009/12T (last quarter of 2009), in field 40 for tax adjustments in favour of the taxpayer, the value of €288,962.79.

The Tax and Customs Authority, in the context of an inspection, understood that this adjustment is not admissible, in light of article 78 of the VAT Code, because:

– although the initial contract for works was concluded between B…, A… and C…, in 2005, its termination in 2009 occurred only between the first two entities, that is the sub-contractor of the work did not participate in this termination;

– there was no return of any goods or merchandise, nor was the inventory account of products and work in progress adjusted in this period;

– furthermore, it is naturally impossible to achieve reciprocal restitution of the contractual performances in question, as there was completion of part of the agreed work, as appears from the description of invoices issued by C…;

– but even if this work had not been completed, it entered A…'s patrimonial sphere via the balance sheet item "products and work in progress".

– as acknowledged by A…, no legal action was brought against C… for performance of the contractual obligation, or for the return of benefits already paid, and therefore there was also no attempt to recover this VAT downstream.

In the decision of the hierarchical appeal, which embodies the final position of the Tax and Customs Authority on the basis for the assessments, the dismissal was based, in summary, on the following:

– the billing cancelled by the credit notes concerns operations actually performed and which, as such, are subject to VAT taxation;

– the requirements provided for in number 2 of article 78 of the VAT Code were not met, lacking in particular cancellation or reduction of the taxable value of the operation as a result of invalidity, termination, rescission or reduction of the contract, return of goods or grant of discounts and rebates;

– for the purposes of this rule, the contractual rescission that allows the adjustment relates to that which occurs before the execution of the contracted works, having no application in situations where the taxed operations are actually performed, even if subsequently there is a dispute between the parties concerning the execution of that contract;

– that is, the cancellation of the invoices would only be legitimate if the operations that they evidence had not been performed, which is not the case. This results, moreover, from the rule itself, which refers to cancellation or reduction of the taxable value of the operation, that is, to a situation in which the invoice comprises more works than those that were actually performed;

– regardless of the intended cancellation of part of the billing, the obligation to assess and remit the tax relating to the works performed would always remain, since, pursuant to articles 7 and 8 of the VAT Code, taxation does not depend on the issuance of an invoice;

– even if the operations evidenced by the invoices had not been fully performed, the credit notes for cancellation purposes would have to reflect the exact measure of operations not performed, which did not occur;

– the part of the billing that corresponds to work performed could not be cancelled, and it would be the Appellant's burden to proceed with invoicing the work in consonance with the level of execution of the works;

– even if the conditions provided for in number 2 of article 78 of the VAT Code were met, the adjustment must be made "until the end of the tax period following that in which the circumstances that determined the cancellation of the assessment or the reduction of its taxable value occurred", which did not happen;

– there is no duplication of collection, for purposes of number 1 of article 205 of the CPPT, to the extent that the taxable facts are different, the VAT assessment being owed by different work contracts, occurring in distinct tax periods.

In its submissions, the Claimant argues the following, in summary:

– the object of the present disputed relationship is the assessment of the (il)legality of the tax acts of additional VAT assessment and assessment of compensatory interest resulting from the audit action carried out by the AT;

– for the purpose of determining this (il)legality only the "contemporaneous reasoning of the act" is relevant;

– the AT based the tax act now challenged on an erroneous application of article 78 of the VAT Code;

– the decision of the hierarchical appeal was not preceded by the possibility of the Claimant exercising the right to hearing, despite new facts being invoked in it;

– the decision of the hierarchical appeal did not pronounce on these new facts, which constitutes an omission of pronouncement from which results pretermission of essential formality;

– violation of the principles of the inquisitorial and material truth occurred because the Tax and Customs Authority did not carry out the necessary measures to determine the impossibility of contacts with C… alleged by the Claimant, for the purpose of attempting recovery of VAT;

– it is not required of the Claimant to ascertain whether C… proceeded with the remittance of the assessed tax;

– the adjustment occurred as a consequence of the contract termination between B… and the Claimant and the refund of all the amounts that the former had delivered to the Claimant;

– the adjustment in question finds basis in number 2 of article 78 of the VAT Code;

– for the purposes of the contract termination, contrary to what is invoked by the AT, the intervention of the sub-contractor (C…) is not required, as with this there is a distinct legal relationship, which was extinguished automatically by lapse, following the termination of the contract;

– it was impossible for the Claimant to contact C…, to attempt recovery of the VAT paid to it;

– such contact is not a necessary requirement for VAT adjustment in the context of the distinct relationship between the Claimant and B…;

– with the contract termination agreed upon by B… and the Claimant there occurred, as required by number 2 of article 78 of the VAT Code, the "cancellation of the operation or reduction of the taxable value as a consequence of (…) termination (…) of the contract", with refund of the amounts paid by B… to the Claimant;

– pursuant to number 5 of article 78 of the VAT Code the VAT refund should occur, by adjustment of the situation, when we are before, as in this case, an intervener in the VAT taxable operation who is a taxable person who cannot deduct the tax, which occurs with B…, because it is a religious entity that carries out operations that do not confer the right to deduction, benefiting, instead, from the VAT refund regime provided for in Decree-Law no. 20/90, of 13 January;

– given the nature of the situation, the non-adjustment of VAT in the sub-contracting is irrelevant, as it did not alter the taxable situation of the Claimant, which deducted the VAT assessed by C…;

– the application of number 2 of article 78 of the VAT Code was the only legally possible procedure having in consideration the termination of the contract between the Claimant and B…, which is a supervening alteration in reality (i.e. contract termination) that determines the rectification of the taxable operation;

– the taxable base (€1,436,037.35) was cancelled, given the refund to B… of the amounts paid;

– the adjustment occurred in a timely manner, in the Periodic Return for 2009/12T, because it was at this time that the "(…) circumstances that determined the cancellation" occurred (article 78, number 2, in fine of the VAT Code) and the termination of the works only occurs with their respective termination, which occurred, precisely, in the course of 2009;

– it is not necessary for goods or merchandise to be returned for the application of number 2 of article 78 of the VAT Code, when contract termination has occurred and that was impossible because it concerns provision of civil construction services, management, coordination and direction of works performed by C…;

– only with the conclusion of the construction works and their adaptation to …, can it be considered that the obligation has been fulfilled and, consequently, the works concluded;

– understanding that the AT that part of the works was concluded, then, instead of cancelling the entirety of the tax adjustment, it could, instead, be partially cancelled the adjustment made by the Claimant (proportionally to the allegedly performed works), but, in the case, it could not be concluded that the works had been even partially executed;

– the subsequent contract for the provision of services concluded for the purposes of construction and adaptation of the Temple has implicit in it complete construction, for the previous "works" were merely preparatory (excavations, demolitions, scaffolding installation, etc.);

– in the new contract it was agreed that payment of the price would be made only "after the date of conclusion of all works to be performed".

3.1. Reasoning of the Acts Relevant

The Claimant raises, first of all, in its submissions, the question of the reasoning relevant to the assessment of the legality of the challenged acts.

As the Claimant refers, in article 44 of the request for arbitral ruling, the immediate object of the proceedings is the decision dismissing the Hierarchical Appeal filed and the mediate object of which are the tax acts practiced following the inspection action carried out by the AT, motivated by the (alleged) improper adjustment of VAT, pursuant to article 78, number 2 of the VAT Code.

The arbitral tribunals functioning at CAAD decide according to established law (article 2, number 2, of RJAT), their activity being limited to the declaration of illegality of acts of the types referred to in article 2, number 1, of the same statute.

One is thus in the context of a mere legality dispute, in which the legality or illegality of the challenged act must be assessed as it occurred, with the reasoning that was used in it, other possible reasoning that could support other acts, with total or partially coinciding decisional content with the act performed, not being relevant. Thus, reasoning invoked a posteriori, after the end of the tax procedure in which the act whose declaration of illegality is requested was practiced, is irrelevant, including those ventured in the arbitral proceedings.

Thus, the Tribunal cannot, upon verification of the invocation of an illegal ground as support of the administrative decision, assess whether the Tax Administration's action could be based on other grounds and fail to declare the illegality of the specific act performed by, eventually, there existing the abstract possibility of a hypothetical act with total or partially identical decisional content, with different reasoning, that would be legal, but was not performed. ([1])

However, in cases of administrative challenge (namely of gracious complaint and hierarchical appeal of acts of assessment), if the respective decision maintains the challenged act with different reasoning, it should be understood that replacement revocation of that act occurs (which will be ratification if the initial reasoning was illegal), with a new act subsisting in the legal order which, despite maintaining the same decisional content, will have the new reasoning. Naturally, if the act that decides the administrative challenge alters the decisional content of the challenged act, namely revoking it partially, one will also be before replacement revocation, with only the initial act remaining in the legal order in the part not revoked, with the reasoning that results from the act that assesses the challenge.

Moreover, the Claimant's position in attributing procedural vices to the decision of the hierarchical appeal is in tune with this understanding, for, logically, these alleged vices can only be grounds for annulment of the acts practiced following the procedure in which they occur (in this case that of hierarchical appeal) and not grounds for annulment of acts practiced previously.

Thus, it is a matter of assessing the legality of the assessment acts, with the reasoning that was given to it in the decision of the hierarchical appeal.

On the other hand, in cases in which the challenged acts have more than one ground, each with the potentiality to, solely by itself, ensure the legality of a tax act (or administrative act) it is not sufficient to conclude the existence of illegality capable of justifying the annulment of the act that some of them is illegal as long as there is one that gives it legal support, for 'the court, to annul or declare the nullity of the questioned decision, issued in the exercise of the Administration's bound activity, cannot be satisfied with the verification of the insubsistence of one of the invoked grounds, for only after verification of the improcedence of all of them is the court authorized to invalidate the act'. ([2])

3.2. Lack of Notification for Exercise of Right to Hearing before the Decision of Hierarchical Appeal

The first vice that the Claimant attributes to the decision of the hierarchical appeal is that of not having been notified to exercise the right to hearing.

Article 60 of the LGT enunciates the principle of participation, recognizing the right of participation of taxpayers in the formation of decisions that concern them.

In paragraph b) of its number 1, taxpayers are recognized the "right to hearing before the full or partial dismissal of requests, complaints, appeals or petitions".

However, in number 3 of the same article 60 such right is limited, establishing that "having the taxpayer been previously heard in any of the phases of the procedure referred to in paragraphs b) to e) of number 1, their hearing is dispensed with before the assessment, except in case of invocation of new facts on which they have not yet pronounced".

The Claimant, in the request for arbitral ruling, argues that, in the case of the records, one is not before a situation of dispensing of the right to hearing, for "new elements were invoked in the context of Hierarchical Appeal", and refers that "by way of example - and, certainly, with great importance - was invoked, throughout articles 57 et seq. of the Hierarchical Appeal, the fact that B… attempted the termination of the situation by mutual agreement, as well as - and more relevant – the invocation and demonstration that, at no moment, and as a consequence of the VAT adjustment, was the Portuguese State harmed in VAT matters".

However, the new facts on which the taxpayer has not pronounced to which number 3 of article 60 refers, are new facts invoked in the procedural decision and not the facts invoked by the taxpayers, for as regards these, being they who invoked them, obviously, they had the opportunity to pronounce on them.

In its submissions, the Claimant no longer speaks of those "new facts", proceeding to refer to the invocation of a new argument (or vice) which is the duplication of collection (articles 14 to 17 of the submissions).

However, it is found that the duplication of collection had already been invoked by the Claimant previously and had been assessed in the decision of the gracious complaint, so it is manifest that it had the opportunity to pronounce on it before the decision of the hierarchical appeal.

Thus, there did not occur an improper dispensing of the possibility of exercise of the right to hearing.

3.3. Violation of the Inquisitorial Principle and Material Truth

The Claimant attributes to the challenged assessments violation of the principles of the inquisitorial and material truth, provided for in article 58 of the LGT and article 6 of RCPIT, because "understanding that the AT should be proved the 'attempt to recover VAT downstream' (i.e. by C…) – and faced with the impossibility of the CLAIMANT in contacting this, as was, moreover, emphasized and demonstrated in the context of production of testimony – should the AT have carried out all necessary measures".

It also says the Claimant that "the AT, by virtue of its functions, will have more information about the 'whereabouts' of the C… company than the Claimant itself and, in particular, would clearly be, in a better position to ascertain whether C… proceeded with the remittance of the assessed tax".

In the decision of the hierarchical appeal, which, as was referred, constitutes the final position of the Tax and Customs Authority on the reasoning for the challenged assessments, no reference is made to attempt at recovery of VAT downstream.

On the other hand, as regards this statement, which is made in the Tax Audit Report, the Tax and Customs Authority does not refer to the attempt at recovery of VAT by C…, but rather the attempt at recovery by the Claimant as is understood unequivocally by the phrase: "no legal action was brought against C… for performance of the contractual obligation, or for the return of benefits already paid, whereby, there was also no attempt to recover this VAT downstream".

It was thus, in the perspective of the Tax and Customs Authority, a proved fact the non-existence of an attempt at recovery of the VAT by the Claimant, whereby it was not justified that it carry out measures relating to that matter.

Thus, there did not occur violation of the principles of the inquisitorial and material truth, relating to the facts considered relevant in the Tax Audit Report.

3.4. Reference in the Tax Audit Report to the Non-Intervention of C… in the Contract Termination

In the Tax Audit Report it was referred that "although the initial contract for works was concluded between B…, A… and C…, in 2005, its termination in 2009 occurred only between the first two entities, that is, the sub-contractor of the work did not participate in this termination".

It is not clear the relevance that the Tax and Customs Authority gave to the non-intervention of C… in the termination, in particular not referring that, by there not being this intervention, the termination did not produce its effects. Moreover, the phrase that follows that one is "There was no return of any goods or merchandise", which lets it transpire that the reference to the non-intervention of C… may be related to the finding of this non-return: that is, it was concluded that there was no return of goods or merchandise because C… was not encompassed by the termination.

However, it is certain that, as the Claimant refers, the intervention of C… was not necessary for the termination to produce its effects in relation to the Claimant and B…, since it is only a matter of VAT adjustment relating to the invoices issued by the Claimant to B….

In any case, the fact is that in the decision of the hierarchical appeal, which as was referred contains the relevant reasoning of the challenged acts, no reference is made to the non-intervention of C…, whereby it is to be concluded that it is not a ground for the maintenance of the challenged assessments.

Thus, no vice is detected at this point.

3.5. Question of the Framework of the Situation in Number 2 of Article 78 of the VAT Code

This is the essential question that is the object of the present proceedings.

Article 78, number 2, of the VAT Code establishes the following:

Article 78

Adjustments

(...)

2 - If, after the registration referred to in article 45 has taken place, the operation is cancelled or its taxable value reduced as a consequence of invalidity, termination, rescission or reduction of the contract, by return of goods or by grant of discounts or rebates, the supplier of the good or provider of the service can effect the deduction of the corresponding tax until the end of the tax period following that in which the circumstances that determined the cancellation of the assessment or the reduction of its taxable value occurred.

(...)

The Claimant understands that the situation described fits in the provision of this rule, having applied the same and issued the credit notes to B… and, afterwards, entered in field 40 of the periodic VAT return for 2009/12T, relating to tax adjustments in favour of the taxpayer, the value of €288,962.79.

In the Claimant's understanding, with the contract termination agreed with B… there occurred, as required by number 2 of article 78 of the VAT Code, the "cancellation of the operation or reduction of the taxable value as a consequence of (…) termination (…) of the contract", with refund of the amounts paid by B… to the Claimant.

The Tax and Customs Authority understood in the decision of the hierarchical appeal that this rule is not applicable to the situation in question because operations that are actually performed and not advances are at issue and that the billing cancelled by the credit notes concerns operations actually performed and which, as such, are subject to VAT taxation. The Tax and Customs Authority argues that "the contractual rescission that allows the adjustment relates to that which occurs before the execution of the contracted works, having no application in situations where the taxed operations are actually performed, even if subsequently there is a dispute between the parties concerning the execution of that contract".

This position of the Tax and Customs Authority is correct.

The obligation to assess/pass on the VAT arises from the realization of the taxable fact – the supply of goods (article 3, number 1, of the VAT Code) or the provision of services (article 4, number 1, of the VAT Code] – which determines this assessment/pass-on to the recipient and establishes the right of the State to demand (article 7, number 1, of the VAT Code) from the taxable person supplier [articles 1, number 1, paragraph a), and 2, number 1, paragraph a), of the VAT Code] the VAT corresponding to the taxable value (article 16, number 1, of the VAT Code) of the operation, an obligation that should be fulfilled regardless of the conditions established between the parties intervening in the operation. This principle is enshrined in article 36, numbers 2 and 4, of the LGT, according to which the essential elements of the tax legal relationship cannot be altered by the will of individuals, regardless of their legal-private consequences.

The assessment/pass-on plays a fundamental role in the functioning of VAT, as it constitutes the instrument that ensures that VAT is borne by final consumers, its recipients, even though the obligation to remit it to the State is the responsibility of the economic operators that carry out the operations subject to the tax.

Thus, in the successive supplies of goods or services that occur in a chain of production or distribution of goods or services, the assessment/pass-on of VAT ensures that any of the economic operators intervening in it proceeds with the charging of VAT from the recipient thereof, simultaneously with the price or the consideration for the operations that they perform.

This mechanism of assessment/pass-on is compatible with the right to deduction, avoiding that, in general, the aforementioned economic operators have to assume as an expense the VAT borne in their acquisitions.

Thus, in the management of the tax, the figures of assessment/pass-on and the right to deduction ensure the role of economic operators as agents for collection of the tax, which they thus remit to the State, even though it ends up being borne by final consumers, through the joint action of the said figures.

When a taxable person participates in a service provision acting in their own name but on behalf of another, it is considered that they received and supplied the services in question personally, as results from article 28 of Directive no. 2006/112/CE of the Council, of 28-11-2006 ("VAT Directive"), in which it is in line with article 4, number 4, of the VAT Code.

In the case at issue, when the contract termination occurred, C…, Lda. had already invoiced the Claimant for the works actually performed and the latter had already invoiced B… for the services actually provided.

In service provisions, the taxable event of VAT occurs at the moment the services are executed [article 7, number 1, paragraph b), of the VAT Code].

It results from the evidence produced that the invoices issued by "C…, Lda." and the corresponding payments by the Claimant, on the one hand, and likewise the invoices issued by the Claimant and the corresponding payments by B…, on the other hand, concern works actually executed, itemized in the invoices. The Claimant itself, although referring that the works performed were merely preparatory, does not fail to acknowledge that works such as 'excavations, demolitions, scaffolding installation, etc.' (articles 17 and 168 of the request for arbitral ruling) were carried out.

Consequently, the State has the right to demand the VAT corresponding to those civil construction works on the date on which the respective invoices were issued, for "in supplies of goods and provisions of continuous character services, resulting from contracts that give rise to successive payments, it is considered that the goods are placed at the disposal and the services are provided at the end of the period to which each payment refers, the tax being due and payable for the respective amount" (article 7, number 3, of the VAT Code, in line with article 64, number 1, of Directive no. 2006/112/CE of the Council, of 28-11-2006).

Thus, in cases of cancellation or rescission of the contract, the supplier can only adjust the VAT that it has assessed/passed on by virtue of the contract, when no operation has been performed in relation to the VAT assessment.

In truth, if there has been consumption of the goods or services subject to the transaction, one cannot understand that, for VAT purposes, this transaction has become void from the moment this act of consumption occurred, even if, from the point of view of Civil Law, one might reach a different conclusion regarding the cancellation or rescission of the contract. For VAT purposes, it should be understood that this consumption occurred with the placing of the goods at the disposal of the customer or with the actual performance of the services to its recipient.

In the case of supplies of goods, for the transaction to become void, in whole or in part, the return of the corresponding goods must, in principle, occur. In the context of these operations, what is relevant is that the goods cease to be in the possession of the acquirer or recipient of their initial delivery.

In the case of service provisions, it cannot be considered that the operation has become void to the extent that the services have been actually performed, thus originating corresponding acts of consumption. For VAT purposes, the cancellation or rescission of the contract requires that the services have not been and cease to be provided, with the practical effects of the service provision contract ceasing.

It is in this sense that the Court of Justice of the European Union has pronounced, as can be seen from point 36 of the judgment of 02-07-2015, given in case no. C-209/14, in which it refers that "it results from the case law of the Court of Justice that, outside the cases of cancellation or rescission of contracts, in which the parties return to the situation in which they found themselves before the conclusion of the contract and in which the taxable person no longer has their credit, article 90, number 1, of the VAT Directive is aimed only at situations in which the counterparty in the contract fails to perform or only partially performs an obligation that results from that contract (see, in this sense, judgment Almos Agrárkülkereskedelmi, C‑337/13, EU:C:2014:328, nos. 23 and 24)".

In the case at issue, following the termination of the contract, the parties did not return to the situation in which they found themselves before its conclusion, for works were performed whose results remained in the legal sphere of B…, whereby the adjustment permitted by article 90, number 1, of the VAT Directive can only be effected to the extent that there was no performance of the obligations resulting from the contract.

Thus, the Claimant does not have the right to the adjustment that it effected, to the extent that the works were performed, because, for VAT purposes, B… benefited from concrete services that were provided to it by the Claimant and that configure acts of consumption on the part of B…. When the contract was terminated, several taxable facts had already been produced, various acts of consumption, and the respective payments had been made by the recipient.

However, only works in the amount of €1,381,565.00 were proved to have been executed, the amount invoiced by C… (to which corresponds VAT in the amount of €282,328.66), and which was maintained in 2009 in the inventory balance sheet of products and work in progress of the Claimant and not in the amount of €1,436,037.22 (to which corresponds VAT in the amount of €288,962.79) that was invoiced by the Claimant to B….

In truth, the dates of the invoices issued by the Claimant to B… are earlier than the dates of the invoices issued by C… to the Claimant, which indicates that those first invoices were, as appears from their description, "payments on account of the Construction of the …", made before the works were invoiced by C…, whereby it cannot be concluded, based on the fact that B… made those payments, that works of that value had been performed in advance.

The doubt about the performance of works in the amount that was paid in advance should be valued procedurally in favour of the Claimant, by virtue of the provision of article 100, number 1, of the CPPT, which comes down to that, for the purposes of the decision, it is considered that such works corresponding to the difference between the amount paid in advance by B… and those invoiced by C… to the Claimant were not performed and their result did not enter its legal sphere.

Thus, to the extent that works were not executed, the contract termination makes possible the VAT adjustment pursuant to article 78, number 2, of the VAT Code.

For this reason, the decision of the hierarchical appeal and the VAT assessment are partially illegal, by violation of article 78, number 2, of the VAT Code, in the part corresponding to the difference, which is €6,634.13, between the VAT corresponding to the value of the works executed (€282,328.66) and that which was assessed by the Claimant to B… (€288,962.79).

Partial annulment is admissible when the ground for annulment applies only to a part of the act, that is, when there is only a partial illegality.

In truth, the Supreme Administrative Court has understood, in general, that assessment acts, by defining a sum, are naturally divisible, and are so also legally, because the law provides for the possibility of partial annulment of those acts, in article 100 of the LGT, by providing for the partial procedence of procedural means of challenge (as previously provided in article 145 of the Tax Procedure Code of 1991). ([3])

Terms in which the request for arbitral ruling is partially granted on this ground, as to the amount of €6,634.13, which corresponds to 2.2958% of the VAT assessment.

3.6. Question of the Untimeliness of the Adjustment

The Tax and Customs Authority invoked the partial untimeliness of the adjustment made by the Claimant relating to the credit notes nos. …/2005, of 2005-10-18, …/2005, of 2005-11-18 and …/2005, of 2005-11-20.

It being established that the adjustment made by the Claimant has legal coverage in article 78, number 2, of the VAT Code as to the amount of €6,634.13, which is encompassed by the value of the credit note no. …/2005, of 04-05-2009, it must be concluded that the adjustment as to that sum was timely.

Consequently, the assessment of the request for preliminary ruling referral to the Court of Justice of the European Union that the Claimant places on this point in its submissions is rendered moot, for being useless.

3.7. Illegality of the Assessment of Compensatory Interest

Pursuant to article 35, number 8, of the LGT, "compensatory interest is integrated into the tax debt itself, with which they are jointly assessed".

Thus, having as ground the assessment of compensatory interest the assessment of VAT, the respective assessment also suffers from partial illegality, in the part corresponding to the illegality of the VAT assessment.

In the case at issue, the value of compensatory interest that corresponds to the amount whose adjustment was legally effected is €1,019.29.

4. DECISION

In accordance with the foregoing, the Arbitral Tribunal agrees on:

a) Declare partially granted the request for arbitral ruling;

b) Annul the additional VAT assessment no.…, in the amount of €288,962.80, in the part corresponding to €6,634.13;

c) Annul the assessment of compensatory interest no.…, in the amount of €44,397.35, in the part corresponding to €1,019.29.

5. VALUE OF THE PROCEEDINGS

In accordance with the provision of article 306, number 2, of the Civil Procedure Code, article 97-A, number 1, paragraph a), of the CPPT and article 3, number 2, of the Regulation of Fees in Tax Arbitration Proceedings, the proceedings are assigned the value of €333,360.15.

Lisbon, 11-10-2016

The Arbitrators

(Jorge Lopes de Sousa)

(Patrick Dewerbe)
(Dissenting as per attached declaration)

(Emanuel Augusto Vidal Lima)

DISSENTING OPINION

Dissenting vote for the following reasons:

  1.  As regards factual matters, I consider it to be proved that the contract for the provision of services was not performed and that the works carried out partially do not possess economic value when individually considered, a fact which led to a new contract having to be made in its entirety.

  2.  As regards the law, I consider that, not having the services been provided in their entirety, there could be place for the application of the provision of Article 78 of the VAT Code, unless it is considered that service provisions in general, because they cannot be returned, are never eligible for the purposes of the regime of adjustments provided for and regulated in Article 78 of the VAT Code, which does not seem to me to be the best interpretation. In this respect there exists extensive case law of the Court of Justice of the European Union formed and consolidated on the subject of VAT adjustments, in the sense of clarifying that:

a. In establishing that VAT invoiced improperly is due, article 203 of the VAT Directive aims to eliminate the risk of loss of tax revenue that may result from the right of deduction by the acquirer of goods or services;

b. The VAT Directive contains no provision on the adjustment, by the issuer of the invoice, of VAT improperly invoiced – it will therefore be incumbent on the Member States to determine the conditions under which this VAT can be adjusted;

c. To ensure the neutrality of VAT, it is incumbent on Member States to provide, in their internal legal order, the possibility of adjustment of any tax improperly invoiced, provided that the issuer of the invoice demonstrates their good faith;

d. In cases in which the issuer of the invoice has eliminated completely, in good time, the risk of loss of tax revenue, the principle of neutrality of VAT requires (i) that this improperly invoiced tax can be corrected, namely by facts verified afterwards, (ii) without this adjustment being able to be made subordinate by Member States to the good faith of the issuer of the said invoice, i.e., without the adjustment depending on the discretionary power of the tax administration;

e. In the case at issue the risk of loss of tax revenue is duly safeguarded by the fact that the … was not able to deduct the VAT in its sphere.

  1.  I also consider that the essential matter to be discussed in the present case, apart from factual matters, is that relating to the verification, or not, of compliance by the Claimant with the adjustment deadlines established in Article 78 of the VAT Code, and in this respect it is the Tax Authority itself that considers that only the adjustments relating to invoices nos. 6, 7 and 8 were made beyond the deadline, with all the others having been made within the deadline.

  2.  Finally, from the point of view of neutrality of the tax, if the adjustment made by the … were not accepted, it is verified that the same transaction gave rise to the delivery in duplicate of VAT, first in the sphere of the … and then in the sphere of the ….

Lisbon, 12 October 2016

Patrick Dewerbe

([1]) Essentially in this sense, the following decisions of the Supreme Administrative Court can be seen, regarding a parallel situation that arises in contentious appeal proceedings:

– of 10-11-98, of the Plenary, handed down in appeal no. 32702, published in Appendix to the Official Gazette of 12-4-2001, page 1207;

– of 19-06-2002, case no. 47787, published in Appendix to the Official Gazette of 10-2-2004, page 4289;

– of 09-10-2002, case no. 600/02;

– of 12-03-2003, case no. 1661/02.

In similar sense, the following can be seen:

– MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479 in which he refers that it is "irrelevant that the Administration should, already pending the contentious appeal, invoke as determining reasons other reasons, not set forth in the act", and volume II, 9th edition, page 1329, in which he writes that "the responsible authority cannot (…) in the response to the appeal, justify the practice of the appealed act for reasons different from those that appear in its express motivation";

– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that "the reasons objectively existing but which are not expressly adduced, as grounds of the act, cannot be taken into account in the assessment of its legality".

([2]) Decision of the Supreme Administrative Court of 10-5-2000, case no. 39073, published in Appendix to the Official Gazette of 09-12-2002, page 4229.

In the same line, the decision of the Plenary of the Supreme Administrative Court of 28-10-2004, case no. 28055, can be seen, in which it was understood that "having the act contentiously challenged a plurality of grounds, the invalidity of one of them does not prevent the court from knowing of the remaining ones and only in the event of concluding the invalidity of all of them can and should the court declare the act null or voidable".

([3]) In this sense, the following decisions of the Supreme Administrative Court can be seen: of 25-5-94, case no. 18048, Official Gazette Appendix of 23-12-96, page 1709; of 9-7-97, of the Plenary, case no. 5874; of 28-10-98, case no. 22603, Official Gazette Appendix of 6-4-2001, page 351; of 17-2-99, case no. 22299; of 22-9-99, case no. 24101; of 16-3-2003, case no. 1973/02; of 27-9-2005, case no. 287/05; of 12-1-2011, case no. 583/10; of 12-1-2012, case no. 965/10.

Frequently Asked Questions

Automatically Created

What is VAT regularization under Portuguese tax law and when can it be challenged?
VAT regularization under Portuguese tax law refers to the adjustment of previously deducted input VAT when the conditions that justified the original deduction change or cease to exist. This mechanism, governed by the VAT Code (CIVA), ensures that VAT deductions correspond to actual taxable transactions. Regularization typically occurs when: (1) goods or services for which VAT was deducted are subsequently used for exempt or non-taxable activities; (2) invoices are canceled through credit notes; (3) there are changes in the use or destination of assets; or (4) the right to deduct is modified due to changed circumstances. A taxpayer can challenge VAT regularization assessments through administrative appeals (hierarchical appeal to the tax director) or judicial means. If the hierarchical appeal is dismissed or not decided within the legal timeframe, taxpayers can file for arbitration with CAAD (Administrative Arbitration Center) under the RJAT regime, or pursue litigation in tax courts. The challenge must be based on legal grounds such as: incorrect application of VAT law, factual errors in the assessment, violations of procedural rights, or disproportionate application of regularization rules when the underlying economic reality doesn't warrant adjustment.
How can a taxpayer appeal an additional IVA (VAT) assessment through CAAD arbitration?
To appeal an additional IVA (VAT) assessment through CAAD arbitration, a taxpayer must follow this procedure: First, file a hierarchical appeal (recurso hierárquico) with the tax administration within the legal deadline (generally 30 days from notification). If this appeal is dismissed or remains undecided for more than 4 months, the taxpayer can then request constitution of an arbitral tribunal with CAAD. The request must be filed within 90 days of notification of the hierarchical appeal decision (or expiry of the decision period), pursuant to Article 10 of Decree-Law 10/2011 (RJAT). The request should identify: the contested acts (liquidation and interest assessments), the legal and factual grounds for annulment, the applicable legal provisions (typically Articles 95-99 LGT and CPPT), and appointment of an arbitrator. The taxpayer pays an initial fee and appoints one arbitrator; the Tax Authority appoints another; these two arbitrators then select a president. Once constituted, the tribunal follows a procedure similar to judicial proceedings, with written submissions, hearings if necessary, and witness testimony. The tribunal must issue a decision within 6 months (extendable). CAAD arbitration offers advantages over traditional litigation including faster resolution, specialized arbitrators with tax expertise, and binding decisions equivalent to court judgments.
What are the legal grounds for annulling a VAT additional assessment and compensatory interest?
Legal grounds for annulling a VAT additional assessment and compensatory interest in Portugal include: (1) Substantive illegality - incorrect interpretation or application of VAT law, such as improper application of regularization rules when legal requirements aren't met, or mischaracterization of transactions; (2) Factual errors - assessments based on incorrect facts, inadequate investigation, or failure to consider relevant evidence presented by the taxpayer; (3) Procedural violations - failure to respect taxpayer rights during audit (right to be heard, access to file, proper notification), insufficient reasoning in the assessment decision, or exceeding limitation periods; (4) Lack of legal basis - assessments issued without proper legal foundation or beyond the tax authority's powers; (5) Disproportionality - when regularization demands don't reflect economic reality or unjustly penalize taxpayers for circumstances beyond their control; (6) Violation of legitimate expectations - when tax authority's prior positions or guidance created reasonable expectations that were later contradicted. Regarding compensatory interest specifically, grounds include: illegality of the underlying tax assessment (if the principal assessment is annulled, interest falls automatically), incorrect calculation of interest amounts or periods, or misapplication of interest rate provisions. The burden of proof generally rests on the Tax Authority to demonstrate the assessment's legality, though taxpayers must substantiate their factual claims.
What is the procedure for filing a hierarchical appeal against an IVA liquidation decision in Portugal?
The procedure for filing a hierarchical appeal (recurso hierárquico) against an IVA liquidation decision in Portugal follows these steps: (1) Timeline: The appeal must be filed within 30 days from notification of the contested tax assessment, pursuant to Article 66 of CPPT; (2) Form and content: The appeal should be submitted in writing to the entity that issued the assessment, clearly identifying the contested act, stating the factual and legal grounds for challenging it, and specifying the relief sought (annulment, reduction, etc.); (3) Competent authority: The appeal is decided by the hierarchical superior of the official who issued the assessment, typically the Director of Finance (Diretor de Finanças) of the relevant region; (4) Suspension of collection: Filing the appeal does not automatically suspend tax collection, but the taxpayer can request suspension by providing a bank guarantee covering the tax debt plus 25%, pursuant to Article 169 of CPPT; (5) Decision deadline: The tax authority should decide within 4 months; if no decision is issued within this period, the appeal is deemed tacitly dismissed, allowing the taxpayer to proceed to contentious proceedings; (6) Notification: The taxpayer must be notified of the decision with full reasoning; (7) Further appeals: If dismissed, the taxpayer can then choose between CAAD arbitration (within 90 days) or judicial appeal to tax courts. The hierarchical appeal is generally a mandatory prerequisite before accessing contentious remedies, serving as an opportunity for administrative self-review.
How does the CAAD arbitral tribunal process work for disputes involving VAT regularization?
The CAAD arbitral tribunal process for VAT regularization disputes operates as follows: (1) Constitution: After the hierarchical appeal phase, the taxpayer files a request with CAAD identifying contested acts and appointing an arbitrator. The Tax Authority appoints another arbitrator within 10 days. These two arbitrators select the president within 5 days, forming a three-member panel that is constituted once CAAD's President notifies the parties; (2) Written phase: The Tax Authority responds to the request (typically within 30 days), presenting its defense. Parties may submit preliminary procedural issues. The tribunal reviews formalities including legitimacy, legal personality, and absence of nullities; (3) Evidence phase: The tribunal may order document production, expert reports, or hold hearings for witness testimony. In VAT regularization cases, this often involves examining invoices, contracts, accounting records, audit reports, and business correspondence to establish the factual matrix; (4) Submissions: After evidence collection, parties file written submissions (alegações) presenting legal arguments and analyzing evidence; (5) Decision: The tribunal deliberates and issues a written decision (decisão arbitral) within 6 months of constitution (extendable to 12 months), which must include factual findings, legal reasoning, and operative ruling; (6) Effects: The decision is binding and equivalent to a court judgment, subject only to limited appeals on procedural grounds to the Central Administrative Court. The process emphasizes efficiency, specialized expertise, and definitive resolution of technical VAT disputes involving regularization mechanisms, deduction rights, and temporal adjustment issues.